Given the supply and demand factors that affect prices, it will be difficult for Federal Reserve officials to distinguish the signal from the noise regarding inflation, said Loretta Meister, president of the Cleveland Fed.
“We have to understand that inflation will continue to be difficult to predict,” he said in a speech at the Massachusetts Institute of Technology.
The Cleveland Fed president said the Fed has not done a very good job of forecasting inflation and that it will continue to be a challenge.
She cited the war in Ukraine, the global economic outlook and pressures in China’s economy as a few uncertainties. In addition, there are consumer and business sentiments, and labor and other supply factors.
Meister said she would be “very cautious” before declaring victory over inflation, which is at its highest level in 40 years.
“We cannot have wishful thinking as a substitute for hard evidence,” Meister said. “So before I conclude that inflation has peaked, I need to see several months of declines in monthly readings.”
The Fed surprised the market last week by penciling in a terminal rate next year in the 4.5%-4.75% range.
The Cleveland Fed president advocated for interest rates to go higher and longer.
“We’re going to have to raise rates, and rates are going to stay longer than we thought,” Meister said. “We cannot avoid pain. We get pain and this is a very painful situation.
But if the Fed does not take “decisive action” to bring down inflation and firmly stabilize inflation, “the cost will be very high,” she added.
The Fed closed on Monday amid concerns that a rate hike could lead the economy into a recession. The yield on the 10-year Treasury note TMUBMUSD10Y;
It grew to 3.9 percent.